19 Nov 2018

Economic outlook shines through gloomy sentiment

1:40 pm on 19 November 2018

The outlook for the New Zealand economy is positive despite the downbeat sentiment of consumers and business.

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Economic growth is expected to be just under 3 per cent into 2019. Photo: 123rf.com

The latest ASB Quarterly Economic Forecast points to a long list of positive indicators that defy the lingering clouds of gloom on the outlook for the economy.

ASB chief economist Nick Tuffley said the economy was clearly shining through, with imports of capital goods holding up along with credit growth to businesses.

Economic growth was expected to be slightly under 3 percent into the end of this year and early next year.

"That's because while surveying shows us that uncertainty about government policy is still impacting business confidence and keeping it at low levels, we are encouraged that, to date, there are few tangible signs that the plunge in business confidence has filtered through to economic growth," he said.

"And as the government firms up key policies, over time the uncertainty business is feeling should reduce."

He said the low interest rate environment was also a plus for the economy, with the Reserve Bank's official cash rate likely to remain at 1.75 percent until August 2020.

"This reflects our judgement that the growth and medium-term inflation outlook will not be strong enough to clear the high hurdle necessary to trigger an OCR hike," Mr Tuffley said, adding that a very mild tightening cycle by the central bank was expected to peak at 2.75 percent from late 2021.

He said New Zealand had not been impacted by the ongoing trade tensions between the United States and China.

"But we need to keep wary eyes out for any slowing of Chinese consumer spending growth due to increasing trade restrictions such as tariffs placed on Chinese exports to the US."

Mr Tuffley said households may be feeling under the pump from rising fuel costs, which had offset the gains from a strong labour market and low borrowing costs.

"Rising costs for necessities (fuel, rent and food) are putting the squeeze on households, particularly those with less disposable income and tighter budgets."

He said the real test for the economy would be whether businesses would be able to pass on the increased costs to consumers.

"If firms find demand is not strong enough to absorb higher prices, economic growth and core inflation could slow over the next six months."

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